East Asia proves World Bank theory wrong

By Chakravarthi Raghavan, Third World Network Features,22 May
1996

Contrary to the World Bank argument
that rapid liberalisation of developing
country economies is essential for fast
growth, the East Asian economies'
success is due to their measured pace
of trade liberalisation.

Midrand, South Africa: Economies that have been 'fast
integrators' into the world economy have grown faster and
have benefited more from the globalisation process which is
underpinned by liberalisation of economies (liberalising
trade and foreign direct investment, or FDI), technological
advances that facilitate transport and communication
networks.

This is the theme, and the thrust of the policy advice
to developing countries from the World Bank in its
publication Global Economic Prospects and the Developing
Countries which was released here at a press conference by
Mr Masood Ahmad, Director of the International Economic
Department of the World Bank, who is credited in the report
as having provided the general direction for the Bank staff
in preparing the report.

The Global Economic Prospects 1996, sixth in a series
of annual reports by the Bank, provides the Bank staff's
annual assessment of global economic prospects as they
affect developing countries and analyses the links between
developing countries and the world economy, particularly in
the areas of trade, FDI and other capital flows and
commodity markets, according to the Bank's chief economist,
Mr Michael Bruno.

The report purports to show that the faster countries
'integrate' into the world economy(as in the case of the
East Asian economies) through liberalisation of trade and
FDI, the faster they grow, with per capita incomes of their
peoples increasing rapidly. Conversely, it claims, the
slower integrators are also growing slowly.

The integration pace and proportion is sought to be
judged through indicators about trade to gross domestic
product(GDP) and FDI to GDP, and credit ratings in
international markets.

The Bank's argument, by confusing effects and causes,
that faster integration in East Asia (both first-and
second-tier NICs and China) produced faster growth, is like
arguing that spotted owls in North America produce the
forests in which they live.

The report has been unable to establish any causal
link between trade and FDI liberalisation and 'openness' of
the economy to the world markets and growth, but suggests
such a link through a purported correlation of statistical
data.

Correlation through statistical data is a tricky
enough exercise, and can be quite misleading for the
unwary. Interpretations of this correlation are even more
tricky.

Even if one assumes the statistical data and
correlation cited by the Bank's report to be accurate and
reliable, in terms of indicators chosen, does it mean that
faster integrators grow fast or does it mean those who grow
fast tend to integrate faster in the world eonomy?

One could as easily argue that increasing the number
of spotted owls increases the rate of growth of its
habitat, the forests.

But even this correlation or attempt at correlation
seems to break down when one examines the facts cited in
terms of trade liberalisation (judged by the average
unweighted tariff rates, over the period 1985-
93, and the FDI/GDP ratios over 1981-93).

To show that East Asia liberalised over the decade
faster, the report engages in some statistical jugglery. It
excludes China from the East Asia grouping and the tariff
rates, but includes China in the East Asia category for the
FDI/GDP ratios.

No explanation was forthcoming from Mr Ahmad when this
discrepancy was pointed out at the UNCTAD-World Bank
colloquium held as a side event at UNCTAD-9.

The fact is that, while liberalising its foreign trade
and lowering its tariffs and inviting FDI, China does
these slowly and cautiously, and justifiably in terms of
trying to manage the transition without too many shocks. As
a result it has some of the highest tariffs, and on FDI has
a restrictive regime, where the foreign investors are
subjected to many restrictions. Nevertheless, the FDI keeps
flowing into China, and its trade too is growing.

The East Asian economies, too, while generally
liberalising their external sectors and investment regimes,
have been adopting a cautious and gradual approach, but
continue to attract more FDI and keep growing fast.

There is a valid explanation for all these (as the
reports and studies by the UNCTAD's Global Interdependence Division
have brought out over the years -- in its Trade and
Development Reports and the more recent papers and reports
for the Kuala Lumpur meeting on the East Asian economies).

The UNCTAD views are shared by a growing number of
mainstream economists in academia. But these contrary
reports don't figure in the bibliography of the World Bank
report.

China in the Far East, according to the Bank's own
index, falls into the category of 'weak integrators', and
thus challenges the Bank thesis. The report gets around
this by noting that this downgrading of China is due to the
drop in its capital market rating (said to be due to the
fall in its institutional investor credit rating), and when
this indicator is disregarded, China becomes a fast
integrator, and proves the Bank thesis about East Asia's
faster integration producing faster growth!

Asked about the Bank's views of the economic policies
and measures for the success of East Asian economies, which
appeared to be quite different from what the countries
concerned said (at the Japanese-organised symposium in Tokyo on the Bank's East Asia
miracle study) had been their policies, or the conclusion
of the recent UNCTAD seminar on East Asian experience, Mr
Ahmad side-stepped the question, and then went on to speak
about the East Asian successes as being due to sound
macro-economic policies and export-led growth.

However, the facts seem to run counter to the Bank
thesis.

Some of the most successful East Asian and South-East
Asian economies, during the period 1971-1980 show a small
ratio of FDI to total investment. It was only 0.1% for
Japan, 5% for Hong Kong, 1.2% for the Republic of Korea,
1.3% for Taiwan, and 14% for Malaysia. China, which is less
integrated into the world economy than Korea, had a 10.4%
ratio of FDI to total investment.

Developing countries in seeking greater integration
into the world economy hope among other things to promote
exports as an engine of growth, and receive more FDI and
technology. Many developing countries, on their own or
pushed by the International Monetary Fund and World Bank,
have undertaken policy reforms to attain these objectives
-liberalisation of trade, FDI regimes and capital account.

Other studies and reports, in the academia and in
UNCTAD, show that liberalisation of trade and FDI inflows
has not always resulted in better performance in exports,
FDI or financial flows. And greater benefits of integration
have not always been associated with greater
liberalisation.

A number of countries that have liberalised their FDI
regimes and offer incentives to foreign investors have not
succeeded in getting significant amounts of FDI. Nor have countries
that have liberalised their capital markets to foreigners and
removed restrictions on private sector borrowing abroad
received any significant inflows of finance. And several
who liberalised trade extensively to improve efficiency and
start an export-led growth, have witnessed rising imports
and deteriorating balance of payments. As a result they
have been forced to cut imports by devaluations,
restriction of domestic demands or reintroduction of high
tariffs.

The success of the East Asian economies on the other
hand has been due to their measured pace of trade
liberalisation, reducing tariffs selectively to enable
their exporters to get inputs at internationally
competitive prices. They have attracted FDI which they
directed to specific areas and sectors. Their differing
degrees of openness to the global economy has been a
deliberate process. They did not adopt a hand-off approach to FDI.

On the other hand, Latin American countries, who
opened themselves up to FDI, and liberalised their external
trade sectors as well as financial sectors, have not been
able to grow as fast as the East Asians nor achieve greater
integration into the world economy.

- Third World Network
Features

About the writer: Chakravarthi Raghavan is Chief Editor of
SUNS (South-North Development Monitor), a daily bulletin,
and the Geneva representative of the Third World Network.

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